MIAMI — Puerto Rico on Tuesday received approval from a federal judge to emerge from bankruptcy in the largest public sector debt restructuring deal in U.S. history, nearly five years after the financially troubled territory said it could not repay its creditors.
Since Puerto Rico went bankrupt, its economic crisis has only been worsened by hurricanes Irma and Maria, a series of earthquakes and the coronavirus pandemic.
The restructuring plan will reduce the bulk of Puerto Rico‘s government debt – some $33 billion – by about 80%, to $7.4 billion. The deal will also save the government more than $50 billion in debt repayments.
And, albeit at a discount, Puerto Rico will begin paying off its creditors, something it hasn’t done in years. The government said in 2015 that it could no longer repay its loans.
“Today is truly a momentous day, and it’s a new day for Puerto Rico,” Natalie A. Jaresko, executive director of the board of oversight that has overseen Puerto Rico’s finances since 2016, told a conference. virtual press Tuesday afternoon. “This period of financial crisis is coming to an end.”
The unelected council, which was created by Congress, is far from popular in Puerto Rico, where many of the island’s more than three million residents refer to it as “the junta.” Critics worry Puerto Rico doesn’t have enough money in its general fund to make even the reduced long-term debt repayments, ultimately forcing more painful economic cuts.
When the territory filed for bankruptcy in May 2017, it had more than $70 billion in bond debt and more than $50 billion in unfunded pension liabilities to public servants. The bankruptcies of other public entities, including the Puerto Rico Electric Power Authority, remain unresolved.
“The agreement, while imperfect, is very good for Puerto Rico and protects our retirees, our universities and our municipalities that serve our people,” Gov. Pedro R. Pierluisi said in a statement. “We still have a lot of work ahead of us.”
The scale of Puerto Rico’s bankruptcy was unprecedented in the United States. The territory had more than $120 billion in debt and pension obligations, far exceeding the $18 billion bankruptcy filed by Detroit in 2013.
Judge Laura Taylor Swain of the United States District Court for the Southern District of New York, who presided over Puerto Rico’s bankruptcy case, noted in her findings Tuesday that some creditors opposed the restructuring plan. But she also wrote that the plan would “enable the Commonwealth to deliver future public services and remain a viable public entity”.
Judge Swain held lengthy hearings on the plan in November, including some in San Juan, Puerto Rico’s capital. Protesters gathered outside the federal courthouse as the hearings began.
On Tuesday, Julio López Varona, an activist and acting campaign director for the Center for Popular Democracy, a left-leaning advocacy organization, called the deal terrible for average Puerto Ricans.
“We’re talking about more budget cuts, more compromises on our services and potentially rate hikes like the ones we’ve seen in the last 10 years,” he said, referring to electricity rates. very high in Puerto Rico. “We know this is an unsustainable deal. Scores of economists have said that Puerto Rico is not reducing its debt enough. It’s a recipe for disaster.
José Caraballo-Cueto, an economist and associate professor at the University of Puerto Rico, says when a federal law giving foreign companies a tax incentive to operate on the island stops at the end of the year, it will will mean less money for the government’s general fund.
“What happens to the general fund will mean more austerity measures for essential services or higher taxes to make the payments,” he said.
The oversight board pushed back against those arguments on Tuesday, forcefully defending the restructuring plan, which says the government has enough to pay off debt through 2034. David A. Skeel Jr., chairman of the board, said the plan was long and complicated. and that many of his detractors probably haven’t read it.
“It’s absolutely sustainable,” he said. “It will not lead to further cuts. I really think there are a lot of misconceptions out there.
An earlier deal was struck in early 2020, but had to be reworked after the coronavirus pandemic wreaked havoc on Puerto Rico’s fragile economy, which in recent years has relied heavily on federal tax breaks and disaster relief funds. Hurricane Maria hit just days after Hurricane Irma in 2017, devastating the island.
Campaigners and elected officials won a major victory in debt restructuring negotiations late last year when the supervisory board scrapped plans to cut pensions for retired teachers and other civil servants. This proposal was rejected out of hand by politicians in Puerto Rico. Many Puerto Ricans feared such cuts would deepen poverty among the elderly.
Johnny Rodríguez Ortiz, who spent 31 years working for the electricity company, now spends every Wednesday morning demonstrating outside the company’s headquarters. He fears that the company’s bankruptcy proceedings will cost him his retirement.
“The only way they left us is poverty or street struggle,” said Rodríguez, 73, from the town of Sabana Grande in southwestern Puerto Rico.
Critics also demanded an audit of how the large debt was incurred and demanded that those responsible be prosecuted or otherwise held accountable.
But for all the controversy the restructuring plan has sparked on the island, it has also charted a way forward – although not necessarily an easy one – after years of debt limbo.
“The restructuring plan will give Puerto Ricans a level of certainty about how much the island will have to pay each year and allow us to create an effective economic policy,” said Heriberto Martínez Otero, executive director of Porto’s Ways and Means Committee. Rico. House of Representatives.
The plan, he added, also “starts the countdown” to the exit from the oversight board. Frustration with the power of the council was so intense that when angry Puerto Ricans took to the streets to oust Governor Ricardo A. Rosselló in 2019, they often chanted, “¡Ricky, renuncia, y llevate a la junta!” “Ricky, quit and take the board with you. (Mr. Rosselló resigned. The board remained.)
To get rid of the commission, Puerto Rico must balance its budgets for four consecutive years and meet other requirements, such as access to the credit market at reasonable rates.
“So at the very least the board will be around for at least another three years,” Skeel said. “It may be a little longer than that.”